Hanmi Financial Corporation

for the company. Please go ahead, sir.

Thank you, operator, and thank you all for joining us today to discuss HOMNY's third quarter 2025 results. This afternoon, HOMNY issued its earnings release and quarterly supplemental slide presentation to accompany today's call. Both documents are available in the IR section of the company's website at HOMNY.com. I'm here today with Bonnie Lee, President and Chief Executive Officer of HOMNY Financial Corporation, Anthony Kim, Chief Banking Officer, and Ron Santarosa, Chief Financial Officer. Bonnie will begin today's call with an overview. Anthony will discuss loans and deposit activities. Ron will provide details on our financial performance. And then Bonnie will provide closing comments before we open the call up for your questions. Before we begin, I would like to remind you that today's comments may include forward-looking statements under the federal securities laws. Forward-looking statements are based on current plans, expectations, events, and financial industry trends that may affect the company's future operating results and financial position. Our actual results may differ materially from those contemplated by our forward-looking statements, which involve risks and uncertainties. A discussion of the factors that could cause our actual results to differ materially from these forward-looking statements can be found in our SEC filings, including our reports on Form 10-K and 10-Q. In particular, we direct you to the discussion of certain risk factors affecting our business contained in our earnings release, our investor presentation, and in our Form 10Q. With that, I would now like to turn the call over to Bonnie Lee. Bonnie, please go ahead.

Thank you, Ben. Good afternoon, everyone. Thank you for joining us today to discuss our third quarter 2025 results. I am proud of our team's outstanding performance this quarter. which continued to advance the momentum we have been building throughout the year. We delivered a strong growth in net interest income, driven by improved margins and further expansion of our loan portfolio. Commercial loans were a key contributor of a total loan production. This performance reflects continued investment in our commercial lending teams, the success of the USKC initiative, and strategic expansion into new markets. The strength of our deposit base in supporting our loan growth was further enhanced by these investments with a consistent activity across all categories. Most importantly, we further improved our outstanding asset quality with the reductions in current size and non-performing loans. These results underscore our commitment to comprehensive loan portfolio management and the strong credit culture that we have fostered at HOPME. Now, let me review some key highlights of the quarter. Net income for the third quarter was $22.1 million, or 73 cents per diluted share, compared to $15.1 million and 50 cents, respectively, in the second quarter. The increase in net income was primarily due to higher net interest income and a decrease in credit loss expense. Return on average assets was 1.12%, and return on average equity was 10.69%. Pre-provision net revenues increased 16.4%, $4.7 million, demonstrating the strength of our core business. Net interest margin in the quarter expanded by 15 basis points to 3.22%, driven by higher average yields and loans, and lower funding costs on a linked-quarter basis. As I just mentioned, asset quality remains excellent, improving from the second quarter due to our proactive portfolio management with the reductions in current size loans and non-performing assets. In addition, we have seen a meaningful reduction in net charge-offs. This improvement is a reflection of our deliberate and ongoing focus on credit as well as collections. Quarter loans increased to $6.53 billion or 3.5 percent on a linked quarter basis with a significant increase in loan production, which was up 73 percent to $571 million. The recent investment we made to expand our CNI banking teams helped drive a strong loan production during the third quarter with the $211 million in new CNI loans across the diverse industries. As I have noted previously, CNI remains a key strategic priority to growing the HANMI franchise. Deposits increased by 0.6% in the third quarter, or 2.2% annualized, driven by new commercial accounts and our expansion into new markets. This growth highlights our ability to consistently build new customer relationships while deepening existing ones. non-interest-bearing demand deposits were stable at approximately 31% of total deposits. We continue to judicially manage our non-interest expense. These efforts are reflected in our improving operating leverage as our efficiency ratio declined to a two-year low of 52.65%. Turning now to our corporate career initiative. During the third quarter, We continue to add new relationships and expand existing ones with the U.S. subsidiaries of Korean companies. Both USKC loan and deposit portfolios experience healthy growth in the quarter, reaching the mid-teens as a percentage of total loans and deposits. While the current macro environment continues to evolve, we are excited about the long-term growth potential of our USKC initiative. In late September, I led a delegation of Hamni executives on a trip to Korea, where we were invited to present in economic forums and participate in several business conferences to share insights with the Korean companies interested in expanding in the U.S. It was a great opportunity to connect directly with so many Korean business leaders to learn about their ambitions and better understand their needs. At the same time, we were able to introduce them to Hamni Bank, and the proven expertise our teams have in helping companies execute on their U.S. expansion plans. As we look forward to the fourth quarter, Hanmi is well-positioned to maintain our strong momentum of the third quarter as we execute our key strategic initiatives and priorities, which include driving loan growth in the mid-single-digit range up from our previous forecast of a low to mid-single-digit growth, further scaling our CNI, residential, and SBA loan portfolios, broadening our core deposit base, strengthening and establishing new relationships within key markets, capitalizing on our solid liquidity position and maintaining solid credit metrics, which reinforce our position as a well-capitalized institution, and sustaining our enhanced asset quality through proactive portfolio oversight and discipline credit management. When I looked at our performance through the first nine months of the year, I am pleased with our results, which demonstrates continued execution of our growth strategy. Year-to-date, loans have grown 4.4 percent, pre-provision net revenues have increased 35 percent, and net interest margin is 37 basis points higher compared to 2024. These are outstanding results, and our team remains focused on continuing to drive this momentum for a strong finish to 2025. I'll now turn the call over to Anthony Kim, our Chief Banking Officer, to discuss the third quarter loan production and deposit in detail. Anthony?

Thank you, Bonnie, and thank you all for joining us today. I'll begin by providing additional details on our loan production. Third quarter loan production was $571 million, up $241 million or 73% from the prior quarter with a weighted average interest rate of 6.91% compared to 7.10% last quarter. As Bonnie mentioned, the increase in loan production was primarily due to a significant increase in CNI originations as well as growth in CRA and residential production. Our commitment to strong underwriting practices ensures we only pursue opportunities that meet our high-quality standards. CRA production was $177 million, up 58% from the prior quarter, and we remain pleased with the quality of our CRA portfolio. It has a weighted average loan-to-value ratio of approximately 47.7% and a weighted average debt service coverage ratio of 2.2 times. SBA loan production decreased slightly from the prior quarter to approximately 45 million, but was still within our quarterly target range. This consistent production highlights the positive impact of our recent team additions and the momentum we're building among small businesses across our markets. During the quarter, we sold approximately 32.6 million of SBA loans and recognized a gain of 1.9 million during the quarter. CNI production reached $211 million during the third quarter, an increase of $158 million, or 296%. The increase was primarily driven by continued investment in our CNI teams, the momentum of our USKC initiative, and our strategic efforts to further expand the portfolio. Total commitments for our commercial lines of credit remain healthy at over $1.3 billion in the third quarter, up 5% or 22% on an annualized basis. Outstanding balances increased by 9%, resulting in a utilization rate of 39%, slightly higher compared to the prior quarter. Residential mortgage loan production was 103 million for the third quarter, up 23% from the previous quarter, primarily due to increased volume from our correspondent lenders. Residential mortgage loan represent approximately 16% of our total loan portfolio consistent with the previous quarter. We sold 67.8 million of residential mortgages during the third quarter. This resulted in a gain on sale of 1.2 million. We'll continue to explore additional sales based on market conditions. USKC loan balance has increased by 8.2% to $910 million, representing approximately 14% of our total loan portfolio. Turning to deposits. In the third quarter, deposits were up 0.6% from the prior quarter, driven by new commercial accounts and the contributions from our new branches. Deposit balances for USKC customers increased by 9.5%, reaching over $1 billion for the first time. Our team is making good progress, adding new relationships that we believe can grow over time. At quarter end, corporate credit deposit represented 15% of our total deposits and 17% of our demand deposits. The composition of our deposit base remains stable, which reflects the success of our relationship banking model. During the third quarter, our mix of noninterest-bearing deposits remained healthy at approximately 31% of total bank deposits. Now, I'll hand the call over to Ron Santarosa, our Chief Financial Officer, for more details on our third quarter financial results.

Good afternoon, all, and thank you, Anthony. As Bonnie noted, free provision at revenue for the third quarter increased 16.4% from the second quarter, reflecting growth in net interest income, margin, non-interest income, and well-managed non-interest expense. Focusing on each component of PPNR, net interest income was $61.1 million and grew 6.9% from the second quarter. Net interest margin also improved 15 basis points to 3.22%. The growth in net interest income was principally due to interest rates where we saw average loan yields for the quarter increased by 10 basis points and average rates paid on interest bearing deposits decrease by eight basis points. To a lesser extent, this growth also benefited from a 1% increase in average interest earning assets and one additional day for the quarter. We also had a recovery of interest of $600,000 from a previously charged off loan, which contributed four basis points to the third quarter average yield on loans and three basis points to the net interest margin. Looking at the 15 basis point increase in the net interest margin, we saw a six basis point improvement from higher loan yields, inclusive of the three basis point benefit from the interest recovery, a four basis point benefit from lower rates on interest-bearing deposits and a five basis point benefit from the combination of higher yields on other interest-earning assets and lower rates paid on other interest-bearing liabilities. Notably, the average loan to deposit ratio for the third quarter was 94.6 percent, down from 95.4 percent for the second quarter. HOMNY adjusted its interest rates on deposits when the Fed lowered the federal funds rate by 25 basis points. Focusing on our savings and money market accounts, the third quarter average rate paid on these accounts fell eight basis points from the second quarter. Looking at our October month-to-date average rate paid on these same accounts, the rate on these deposits is down 23 basis points from the third quarter average rate of 3.22%. and the month-to-date average rate paid on all interest-bearing deposits is down 11 basis points from the third quarter average rate of 3.56 percent. Non-interest income for the third quarter was $9.9 million, 22.4 percent above the second quarter. The increase primarily reflects the absence of gains from the sales of residential mortgages in the second quarter and a higher level of bank-owned life insurance death benefits realized in the third quarter. Bank-owned life insurance policy income for the third quarter included $900,000 from death benefits, while the second quarter included $400,000. Gains from the sales of residential mortgages were $1.2 million for the third quarter, while there were no sales for the second quarter. Non-interest expense before OREO and repossessed personal property expenses increased 1.5% quarter over quarter, primarily from higher professional data processing and occupancy expenses. OREO and repossessed personal property expenses swung to a net charge of $49,000 for the third quarter from a net benefit of $398,000 for the second quarter due to a gain from the sale in that quarter of an OREO property. Reflecting higher revenues, the efficiency ratio for the third quarter moved lower to 52.65% from 55.74%. Turning now to the credit loss expense for the third quarter, which was down $5.5 million quarter over quarter to $2.1 million for the third quarter from $7.6 million for the second quarter. In the third quarter, HOMNY collected $2.6 million from a previously charged-off loan, recognized as a $2 million loan loss recovery and a $600,000 credit to interest income. This loan loss recovery led to net loan recoveries of $500,000 for the third quarter compared to net loan charge-offs of $11.4 million for the second quarter. The ratio of the allowance for credit losses to loans ended the third quarter in at 1.07%, reflecting an increase in our qualitative loss factors. Capital ratios remain strong, with the company's preliminary common equity Tier 1 ratio at 12% and the tangible common equity to tangible asset ratio at 9.8% at the end of the third quarter. In addition to third quarter dividends of $0.27 paid to shareholders, Homni also repurchased 199,698 common shares at a weighted average price of $23.45. I'll now turn the call back to Bonnie for her concluding remarks. Bonnie?

Thank you, Ron. We are proud of the momentum we have built so far in 2025 and remain optimistic about the compelling long-term growth opportunities that buy ahead. Our client-focused strategy and relationship-driven banking model empower our team to provide excellent service and forward-thinking, industry-leading solutions. Along with our ongoing emphasis on prudent expense control and strong asset quality, we remain committed to growing the Hanmin franchise and building enduring value for our shareholders.

Thank you. We'll now open the call for answers to your questions, operator. Please open up the line.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. Please limit yourself to one question and one follow-up. One moment while we pull for questions. And our first question we'll hear from Kelly Mata with KBW.

Hey, good afternoon. Thanks for the question. Great quarter. Maybe kicking it off with loan growth. I mean, it was super strong in Q3. You guys have highlighted the work that you've done with CNI and now you're looking for mid-single-digit growth. Wondering if that's for the full year. It doesn't seem like you need to get much in Q4 in order to hit mid-single-digit growth. So wondering if there's any pull forward that we should be thinking of and just from a go-forward basis given the investments you've made in the team and the strength you've been seeing if maybe a bit higher is a good run rate going forward. I know there's multiple parts in that, so maybe I'll stop there. Thanks.

Sure, Kelly. Let me try to answer your question in different steps. Net loan growth is a function of production and actually another part is the payoffs. You know, we provide the guidance of single-digit loan growth for the year. It is that we really do not know what the payoffs are going to be in the fourth queue. But knowing just in the pipeline, you know, we are looking at a similar pipeline as going in in the third queue. But what was unique in third queue was, you know, we actually ended up booking new loans higher than the initial pipeline. So we had built the pipelines throughout the third queue. So that was one of the reasons that we had a very strong production. So in terms of, you know, the teams that we had were able to brought on. know a couple of teams and and we've been actually uh communicating this and and we've been investing for the last uh a couple of quarters so and i'm focusing on the cni lending efforts the production came in from very broadly diversified industries including manufacturing as well as the uskc automotive suppliers so with all these putting together, you know, we are hopeful that we can deliver the single-digit growth for the year.

Okay. That's helpful. And then, I mean, maybe switching to credit, after last quarter's sort of anomaly, it seems like things have been well controlled. You had the net recovery. Obviously, there's been some credit noise just more broadly this quarter. Just wondering from a high level what you're seeing, what you're watching more carefully in any update or change in terms of how you guys are thinking about the asset quality picture ahead.

So, you know, we've been actually very comprehensive and consistent, you know, consistent on looking at our loan portfolio and managing. So, you know, Best way to do it is, you know, you have to slice and dice the portfolio. Any possible problematic loans, you know, we need to usher them out. So that's one of the reasons that, you know, we keep very clean asset quality. And during the queue, part of the payoffs actually were some of the loans that we did not want to retain. So we had communicated to the borrower. given them much of a time so for them to, you know, refi us out or pay us off. So that's one of the practices that, you know, we've been consistent. And obviously, given this environment, you know, we look at our mortgage loans and SBA loans, really focus on looking at them. And in terms of just looking at the trend, it's very, very consistent and have actually very satisfactory trend under both of those loan categories.

Got it. Maybe last question for me and then I'll step back is just on the funding side given how strong loan growth was. It did push the loan to deposit ratio on an EOP basis up to about 97%. Just wondering if you could refresh us on how you guys are thinking about funding and the balance sheet going forward is deposit growth needed for additional loan growth and a constraining factor there. Thanks.

Sure, Kelly. So, yeah, so when you look at the third quarter, again, I look at the averages because that's what kind of drives the quarter. And so you can see, you know, the average loan or deposit much lower than where we were. So we had what I would characterize as balance sheet utilization that helped propel the earnings and also buoyed up the net interest margin. Starting with the spot balances, as you've pointed out, we're a little bit richer. Loan balances are above our averages, so I can see that growth there. So we will need deposit growth to keep the margin expanding, let's say, at a higher pace than what we've experienced. But when I look at the funding side, that is deposits, you can see that our deposit costs are moving down nicely. We're anticipating that there will be a 25 basis point move by the Fed next week and likely another 25 in December. So I can really foresee that the cost of average interest-bearing deposits will continue to step down nicely. What I can't see is clearly, because the vectors, depending on our loan growth as well as overall deposit growth, is how much do we need to look to borrowed funds, which have a higher marginal cost. So, that can dampen the growth in that interest margin, but I don't see it negating growth. I just can't tell you how much it might grow.

Thanks, Ron. That's helpful. I'll step back. Thank you. And once again, please press star one if you would like to ask a question. And our next question will come from Matthew Clark with Piper Sandler.

Hi, this is Adam Kroll on for Matthew Clark, and thank you for taking my question.

Yeah, so maybe just to start on the funding side, so I really appreciate the average rates provided for October. I was just curious, do you expect to reduce deposits at a similar pace to what you disclosed for October, which with each subsequent rate cut? And do you feel you can achieve a downward deposit beta near the 70% that you disclosed in the DAC since last August?

Well, for the September rate decline,

I think we did, to be very specific, Anthony and team did a very good job at reducing our rates. So I feel very comfortable that the team will do the same when we get to next week. Of course, it still remains to be learned how the marketplace reacts, which is another buffering factor. But We believe we can be disciplined in our deposit costs and be more like, let's say, an average traditional community bank in that arena. So I'll stay optimistic that we'll be achieving betas that are very reasonable relative to potentially a 50 basis point decline over the next couple months. What we can't see well, and Bonnie alluded to a little bit, is that loan growth, we expect it to be favorable. We can't necessarily see prepays too well, because I can start to envision that as rates fall, there may be competition for assets at prices perhaps lower than what might be reasonable in a marketplace. And then to make myself happy, I'll look at my time book and said, okay, I have almost two-thirds of that book repricing over the next two quarters. That average rate's at 4%, so I know I'll pick up something there. So altogether, and to kind of argue on both sides of pluses and minuses, I still think there's an opportunity for margin to expand. I just can't wager yet by how much given what we might be facing in the deposit arena and what we might be facing in the lending arena.

Got it. No, that's super helpful.

So kind of going off of that, would you be able to speak to what you're seeing in terms of competition on the lending side? And have you seen any sort of compressing of spreads in that regard?

Yeah, we do see a competition coming in, especially in CRE area, asking for lower rates. But we do selectively compete on the particular loans. So we don't, I mean, with the rates coming down, I mean, we naturally see those competition. And the deposit side as well. despite the Fed cut in September, I think our competition still is very competitive in city pricing. So we do see competition coming in, loans and deposits, but I think it's manageable.

Got it. I appreciate the comment there.

If I could squeeze one more in, just on capital, do you expect to remain active on share repurchases, given your healthy capital levels?

Yes, as I mentioned in prior calls, the board will look at the repurchase each and every quarter. Last quarter, the marketplace gave us some tremendous opportunities. I think the board did an excellent job in taking advantage of that. So, we'll look at it again, but I do think you should anticipate repurchases, you know, each quarter. It's just the order of magnitude will always be the, you know, the question on the table.

Got it. Thank you for taking my questions. Thank you.

And once again, if you would like to ask a question, please press star followed by the digit 1. Next, we'll hear from Hamad Hassan with DA Davidson.

Hamad Hassan on for Gary Tanner here. Great quarter. Nice to see the fee income increase from the mortgage loan sales. I noticed that you guys weren't active on that in the last quarter, so is that something that could potentially continue in the next couple quarters, or is that something that will normalize?

As we tried to point out when we met last quarter, the sale that would have occurred in the second quarter was delayed just a bit, so it happened early in the third quarter. But on a go-forward basis, we do anticipate each quarter to have gains from the sales of residential mortgages, again, depending on market conditions. But yes, every quarter we should have something. Right. As we disclosed, there was about a $900,000 gain, I think in July that would have, you could kind of then take a look at that differential and you can try to find a normal run rate.

Okay. That's a great color. And maybe as you guys were talking about the corporate Korea initiatives and Bonnie mentioned that she met a bunch of clients there. Any update on just the general business sentiment over there?

Yeah, so expansion into U.S. market, U.S. as well as North America, there are tremendous focus from the particularly mid-sized businesses in Korea. So, and the trip that we had in September, you know, they gave us a great opportunity to, you know, introduce kind of banking in the United States one-on-one. So that was really well received. And we did learn, you know, Korea as a country has a potential of about small and medium-sized business of about 8 million.

So that's why I think that we are, you know, continues to be optimistic in the US KC business.

That's great to hear. And then maybe the last one for me. Can you remind me about your NDFI exposure?

Oh, it's very, very small. I, less than, just less than 1% or thereabouts. All right, yeah, that's what I figured. Thank you, guys.

Thank you.

Thank you. We have no further questions in the queue at this time. I'll now turn the call back to Ms. Bonnie Lee for concluding remarks.

Thank you for participating in today's call. We value your interest in HANMI and look forward to keeping you informed of our progress and results.

And that will conclude today's call. We thank you for your participation.

You may now disconnect.